This late in the year, your best option is to make moves to lessen your overall tax burden. While no one enjoys paying taxes, it is still better to have your wealth growing than shrinking.
Usually, capital losses can be used to offset capital gains. Up to $3,000 of excess losses can be used to offset ordinary income, with excess losses carried forward indefinitely. Investors may be able to offset gains by selling underperforming stocks for a loss. With the markets’ climb in the last several years, you may not have significant losses to completely offset your gains.
Some investors may be able to reduce their adjusted gross income, potentially, placing them in a lower tax bracket. Generally, you can lower your AGI by making tax-deductible IRA, 401(k) or defined-benefit retirement plan contributions. Traditional 401(k) or 403(b) contributions are made through payroll deductions. You can contribute up to $17,500 in 2013 with an additional $5,500 catch-up contribution for those 50 and older. The deadline for contributions is the last pay period of the year.
If your 401(k) plan prohibits you from changing your compensation deferral in December, you may consider making a deductible, or at least partially deductible, traditional IRA contribution. For 2013, you can contribute $5,500 to an IRA with an additional $1,000 contribution if you are 50 or older. If you are covered by a workplace retirement plan, the IRA contribution tax deduction phases out as your AGI reaches between $59,000 and $69,000 for single filers and head of household filers. For married couples filing jointly, the income phase-out range is $95,000 to $115,000, if you are the spouse making the IRA contribution and you are covered by a workplace retirement plan. The phase-out range is higher if the spouse making the IRA contribution is not covered by a workplace retirement plan.
I know you’re wondering where you’ll get $5,500 to save to an IRA during the holiday shopping season. The good news is the deadline for 2013 contributions is Tuesday, April 15, 2014. If you are paid biweekly, you probably have at least seven paychecks between January and the April deadline. If you’ve already contributed to your own retirement, don’t overlook your children’s education. All Georgia taxpayers, regardless of income, can contribute and deduct up to $2,000 to Georgia’s 529 plan on any beneficiary’s behalf. Contributions made during 2013, or before the April tax deadline, are eligible for the deduction.
Keep in mind, some investors may have to contend with the 3.8 percent Medicare “surtax” on net investment income, meaning higher-income taxpayers may pay as much as 23.8 percent in capital gains taxes on investment income, depending on their tax bracket. Oh yeah, don’t forget the state of Georgia gets their 6 percent as well. Happy Holidays!
William G. Lako Jr., CFP, is an executive in residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Lako is a certified financial planner.The Marietta Daily Journal will periodically publish columns from KSU business faculty.